All Commentary
Tuesday, January 8, 2019

Greedy Politicians Are Already Wrecking the Legalized Cannabis Industry

If legalization is just an excuse to increase regulatory burdens for entrepreneurs and excessively tax consumers, then no one stands to make any money at all.

On New Year’s Day 2018, California became the sixth state to end prohibition by legalizing the sale of recreational cannabis. In addition to striking a blow against the disastrous War on Drugs, the full-fledged legalization of marijuana was also expected to trigger an economic boom throughout the Golden State, as it did in other states like Colorado.

Now that the first year of legal cannabis sales has come to a close, however, it appears that reality has fallen short of the initial projections. And thanks to California’s proclivity for excessive regulation and taxation, the “green rush” that the state hoped for has yet to come to fruition.

The Green Rush That Never Was

Over the last several years, marijuana legalization has proven to be an idea whose time has come. As it stands today, ten states and the District of Columbia allow for recreational use of the plant and an additional 23 states allow for medicinal use. National polling also shows that 62 percent of the country now favors some form of legalization.

In 2018, cannabis sales only amounted to $2.5 billion, which is half a billion less than the total for 2017, when only medical cannabis was legal.

Most people now realize that the War on Drugs has been a complete disaster as well as a huge waste of resources, which has softened many hearts when it comes to the issue of legalization. But there are also economic incentives that have made ending prohibition exceedingly popular across the country. By legalizing cannabis, you open up the door for an entirely new industry with the potential to bring in billions of dollars in revenue each year and create a countless number of new jobs. This is appealing even to those who are personally opposed to recreational use of the plant.

California had high hopes that this would be the case with its own economy. On the eve of legalization, several state officials predicted that recreational cannabis would result in the creation of 6,000 new dispensaries across California. This certainly would have made a substantial impact on the economy, but unfortunately, the actual number of new stores fell far below the prior year’s generous predictions. According to the California Bureau of Cannabis Control, only 547 temporary and annual licenses were issued to new retail stores in 2018. As a result, the green rush that was expected to grow the economy never came. In 2018, cannabis sales only amounted to $2.5 billion, which on its own might not seem too shabby but is, in fact, half a billion less than the total number of sales for 2017, when only medical cannabis was legal.

So why has California failed to replicate the booming green economies of other states? Unfortunately, the answer to this question is the root of the majority of the state’s problems: too much regulation and taxation.

Taxed and Regulated to Death

Setting up shop in California’s heavily regulated economy is hard enough for regular businesses, but when a substance like cannabis is involved, the process becomes all the more complicated.

California currently has a ban on marijuana delivery services, which has made it more difficult for “potrepreneurs.”

For starters, business owners have to seek approval not only from the state but from local municipalities as well. Unfortunately, many cities have instituted their own bans on recreational cannabis. Of California’s 482 different cities, only 89 actually allow recreational dispensaries. Other states have faced this problem, but many dispensaries have taken advantage of a loophole in the system.

By offering product delivery, many dispensaries have been able to expand their services to cities where the dispensaries themselves have been banned, but the use of the plant is still legal. California currently has a ban on marijuana delivery services, which has made it more difficult for “potrepreneurs” to meet the demands of those living in cities where dispensaries are still illegal. However, the Bureau of Cannabis Control is looking at a proposal that would put delivery of the plant back on the table, which would help boost sales across the state.

Even those living in one of the 89 cities where retail is permitted are still subjected to layers of regulation that make it difficult to get a business up and running. Having to seek licenses from both the state and the city is difficult enough on its own, not to mention expensive. But prospective dispensary owners must also comply with rules and regulations handed down not only from the text of the Medicinal and Adult-Use Cannabis Regulation and Safety Act but also from the Bureau of Cannabis Control and any local governments as well. This makes the whole process extremely tricky to navigate.

As Dale Gieringer, director of California NORML told the Los Angeles Times,

The cannabis industry is being choked by California’s penchant for over-regulation. It’s impossible to solve all of the problems without a drastic rewrite of the law, which is not in the cards for the foreseeable future.

Another difficulty faced by cannabusinesses all across the state is finding a bank willing to do business with you. Since federal prohibition is still very much in effect, banking institutions are nervous to get into bed with the industry. Already, banks are overly scrutinized in an attempt to monitor potential criminal or terrorist activities. Doing business with dispensaries does put these financial institutions at risk, so the fear is justified.

Once all these regulatory and financial hurdles are overcome, there is still one major issue: the black market. Since marijuana sales are subject to a “sin tax,” consumers end up paying the government 35 cents for every dollar they spend on legal cannabis. This has made the black market ever more intriguing to consumers, who know they can escape excessive taxation by going through a street dealer. According to Fitch Ratings, when all is said and done consumers end up paying about 45 percent more for legal marijuana than they do on the black market.

Tom Adams of BDS Analytics, a company that tracks the cannabis market, said:

The bottom line is that there’s always been a robust illicit market in California—and it’s still there. Regulators ignored that and thought they could go straight into an incredibly strict and high-tax environment.

It’s actually rather shocking that California hasn’t been leading the way in the cannabis industry, considering how it has led the nation in ending prohibition.

California Should Be Leading the Way

It might not have been the first state to legalize recreational cannabis, but it has generally been ahead of the game when it comes to ending marijuana prohibition in general. In 1996, the state passed the Compassionate Use Act, which made the plant available to those seeking it for medical purposes. This was the nation’s first law of its kind, but it wasn’t the first time California had taken a jab at the drug war.

In 1972, it became the first state with a ballot initiative for the legalization of marijuana. Had Californians voted “yes” on Proposition 19, the law would have been changed to ensure that “no person in the State of California 18 years of age or older shall be punished in any way for growing, processing, transporting, or possessing marijuana for personal use, or for using it.”

Government overreach has hampered the cannabis industry from raking in the revenues that many had hoped it would.

Of course, it would not be until 2016, when California voters passed the Adult Use of Marijuana Act, that the state would finally legalize recreational use. But considering that medical cannabis had already been a consumer good for over ten years, state regulators should have at least had some exposure to how a legal market might look.

But California is known for its overly-regulated and heavily taxed economy. And this climate of government overreach has hampered the cannabis industry from raking in the revenues that many had hoped it would. If California regulators are wise, they will take a lesson from other states.

As the Los Angeles Times reports:

There is less of a tax burden in Oregon, where voters legalized recreational pot in 2014, and state and local taxes are capped at 20%. With nearly a tenth of the population of California, that state has more licensed cannabis shops—601. On a per capita basis, Alaska has also approved more pot shop licenses than California,—94 so far. The state imposes a tax on cultivation, but there is no retail excise tax on pot.

Legalizing marijuana is about a lot more than money. At the core of the argument against prohibition is the belief that every individual has the right to determine what substance they choose to put into their bodies.

However, while not everyone is on board with the “I own me” philosophy, economic incentives have helped make legalization more appealing to those who may have traditionally been opposed to it. But as California is learning the hard way, if legalization is just an excuse to increase regulatory burdens for entrepreneurs and excessively tax consumers, then no one stands to make any money at all. This is an important lesson to keep in mind as more states finally move to put an end to prohibition.

  • Brittany is a writer for the Pacific Legal Foundation. She is a co-host of “The Way The World Works,” a Tuttle Twins podcast for families.